Friday, April 25, 2008

Samsung didn't cut their capex. They're still going to spend Eight Billion Dollars on semiconductor capital equipment this year. The nice thing about them being in so many businesses is they can subsidize the lower chip margins via success in other areas and keep putting the pressure on their ailing competitors with the sheer magnitude of their capacity. Hopefully they drive some guys out of business like this. Hopefully it won't be Micron.

They guided next quarter down 20% relative to consensus on weaker DRAM orders and suggested September wouldn't improve but indicated December could be better. As the semicaps are talking about a recovery in late 08/early 09, the cycle investors will start to build positions. That's why they (LRCX, VSEA) aren't staying down on these lower revisions.

Touchpads for PCs were about 1% light relative to consensus revenue estimates, offset by higher mobile touchpads. On the conference call, Synaptics gave lower gross margin guidance relative to consensus. They said they'd decline slightly to 40%. The street is at 41%. The reason cited was new program implementations (mobile phone touch pads) that presently carry higher costs. Operating expenses were also guided a little higher due to increased legal expenses. Lastly, 1/3 of their $150mm cash is trapped in the auction rate securities market... which I view as non-operational and not a reason to sell as long as it doesn't impact their ability to do their core business.

Thursday, April 24, 2008

So Rackable revenues were abysmal. 81mm estimate, comes in at 68mm. Ridiculous. Guide to 68-72mm with street at 88mm. Awful!

But... gross margins were an absolute blowout, coming in at 23.5 - 24.0% depending on whether you're using GAAP or non-GAAP. Estimates were for 16%. That's obviously gigantic. The company must have made a decision to walk away from some unprofitable business. The stock gets no credit for its price to revenue valuation (it trades at under 1* that metric and can't be valued on that. The book value is 70% of the share price. The revenue bar is coming in so much but they're still guiding to 350mm in sales for the year. Just for perspective, 67+72 (the revs they put up and guided to) get you to 139mm. So they're saying the second half of the year will be over 200mm? Margin guidance is going to be key here as they're telegraphing an awful lot of growth.

Revenues come in about 50mm better at 2.11 bil. EPS blow out at $1.23 with street closer to $1.10 on a gross margin upside of 22.6% relative to consensus of 21.9%

No guidance in the release. Reading it, they think they're in a totally different market from Seagate. The street has a big down quarter modeled in the wake of Seagate... and they're a little arrogant. I kind of think the guidance is going to be better than the models for next Q. We'll see.

So low end of revenue guidance puts company at consensus estimates. Operating income estimates are for $6.2 bil, and EPS consensus is .48, which are both at the high end of their guidance ranges. They're telling us margins are under pressure. Vista up-sell weaker than expected?

Something isn't right here. Glad I made the sale. More after the call.

Sorry this is kinda late in the day. I had some personal things to take care of so I've been out. That also means this will be somewhat brief and more touchy feely than usual, if you can believe that.

Microsoft (MSFT)

Why is this stock so strong? Because Intel didn't blow up?

Expect Microsoft to be dogged somewhat on the call. Expect questions about the sustainability of xbox momentum ex-Haloesque titles – platform sales have been slowing in particular for Microsoft as Nintendo and Sony gobble up share around their early lead.

Do you have to Yahoo, guys? Really?

Will Vista ever work right?

I was long this till I read my piece. Funny.

Varian Semiconductor (VSEA), KLA Tencor (KLAC)

Lots of memory. Lam is up $2 on terrible numbers so we're temporarily in look-through mode. Uninvestable for the time being.

Synaptics (SYNA)

Notebooks okay… maybe even good based on volumes. iPod was probably a disaster in the quarter but will start to grow again. Further traction in smartphone touchscreens a positive. I'm long from $26ish and I sold half 5 minutes ago at $33.18 – blind on the quarter. I have no edge, I bought it on a value dislocation after their blow-up.

Rackable Systems (RACK)

Canacord Adams said they made #s and had enough detail on specific product traction that I would assume he knows something. Dot com spend still robust. Price competition still rough. Think they guided very conservatively last quarter and this was a beat and raise company for a long time – maybe it can be again. Long it from $8ish and staying with it.

Western Digital (WDC)

Better than Seagate. Margins will be stronger. Seagate said they didn't trash pricing at end of quarter – I think they lied. I don't think WDC had to stuff in the same way to make numbers. That said, hard drive channel inventories are running above historical norms and they should probably take the bar down. If they don't and it rallies, I'm a seller. I generally have been positive on this stock in the mid to high 20s and negative in the mid 30s. If anything, the story has deteriorated. It's still cheap if you believe the earnings estimates. I'm starting to lose faith.

Apple beat revenues by a wide margin and guided next quarter's revenues to in-line with the street. They had a gross margin miss relative to the consensus but not their guidance. The main drivers of the story are unchanged -- Mac market share gains and the 3G iPhone shipping in June.

The margin "miss" in the current quarter was driven by much lower sequential sales in operating systems -- 170mm in Leopard revenue last quarter became 40mm this quarter. Honestly, I'm amazed they get away with that. If I were a Mac user, I'd be so angry that I had to buy an annual software update. But they get away with it.

I also believe that Apple did not buy much NAND in the March quarter and iPods sold reflected earlier and higher component prices. NAND prices were lower than the prior quarter but not low relative to current NAND pricing. Apple's tepid margin guidance may reflect a larger storage iPod refresh coming that will offset the component cost declines they're enjoying due to lowered NAND prices. NAND pricing has gotten even more favorable for them and iPods are stagnant. As iPods have become so ubiquitous among consumers, the line is dependent on increased features to drive replacements and new units. iPods have fixed pricing and Apple wants to hold pricing if at all possible. It is likely they will double storage in the next refresh of the line -- they already did it at the high end of the NAND portfolio (the iTouch and iPhone). It's not hard to see it coming in the Nano too. This could explain the weaker margin guidance relative to models. iPods represent a decent chunk of revenue -- 10.6 mil at an average selling price of $171 gets you to 1.8 bil (24%) of 7.5 bil total. If they choose not to refresh the iPod line, they'll likely start to show declining iPod revenue... and no one wants to see that.

Apple gets substantial kickbacks from AT&T for the iPhone and analysts were excited about the deferred revenue component. This will help bolster gross margins as the iPhone base builds -- it flows through over the life of contracts and is essentially pure profit. iPhones have a high cost up front for Apple in that they recognize all the cost of goods on the sale of the phone but they reap the benefits of that sale for 2 years afterward. In theory, they could sell the hardware at a loss and still recoup the phone's cost over the life of the AT&T contract. Obviously, it's better if they make money on both ends, which they do... they just make a better margin on the back-end.

This quarter may be a little dicey as the 3G iPhone won't ship until June, the enterprise connects to Microsoft Exchange won't ship till June, the iPod refresh won't happen until... well, who knows... and the Macbook enthusiasm likely fades somewhat as the ubergeeks already got theirs. However, September and December should be gangbusters.

I think you have to buy Apple on weakness. None of the main drivers are different or gone.

Wednesday, April 23, 2008

Results were decent. Guidance is a horror show. They're guiding shipments down 15-25% to 490-530 mil. Revenue guidance of 535-565 mil is far below consensus of 615 mil. Gross margin guidance of 43% is down substantially -- admittedly, some of that is being blamed on the SEZ acquisition and they're suggesting its somewhat temporary in nature. GAAP EPS guidance of .32 - .42 is significantly below consensus of .88

Again, this is the realization quarter. It can get worse... but it's hard for it to accelerate worse.

Great management. Not good enough to offset 80% memory exposure.

Interestingly, they're still forecasting a NAND capex increase of 10% for this year. I wonder if that's too optimistic.

Hmm. I'm going to have to put a stop on this trade. Breaks $157 and I'm out.

Gross margins missed consensus by 3/4 of a point on a big revenue upside.

I kind of think for them to increase their mac share like they did, that's something they should get a pass on -- they can trade some margin for some share. I also think Apple bought very little NAND in the quarter and they were passing through much higher cost NAND all quarter through iPod.

Guidance of 7.2 bil and EPS of $1.00 is better than consensus. THATS A BIG DEAL AND THE MOST IMPORTANT THING IN THE RELEASE. They guide conservatively.

I bought stock at $162.

8:25pm: As John pointed out, I was overexcited here. (Note the caps. God.) I still think the revenue guidance in line with the street is "better" in Apple-speak, but it is sequentially down and the EPS guidance is below consensus. Sorry if I caused you any pain.

As I previewed, Xilinx misses and guides a bit below consensus. Gross margin guidance of 63-64 looks pretty good actually, but revenue guidance with a midpoint of +1% puts the single point at $480mm with the street at 489mm. I'm sure there's going to be talk about inventory build in the distributor channel on their call.

I'll use weakness to cover. I'm not in this long-term. It was just a trade around the number.

The Company's guidance for the second quarter of 2008 is predicated on aprotracted weakness in the DRAM market. For the second quarter, Mattsonexpects the following: -- Revenues in a range of $40 million to $45 million -- Gross margins between 39 percent and 41 percent -- Earnings in a range of loss per share of ($0.17) to loss per share of ($0.10) -- Fully diluted share count of 49.5 million.

... the street is at $51mm with gross margins of 44%, looking for a profit of 3 cents. Big disappointment.

Orders are going to stink. Memory capex cutbacks are upon us and severe. The problem is... well, we ought to know that. Who is wildly bullish on memory here besides a handful of Sandisk traders with some fresh spot quotes?

Samsung, a big customer of Lam's, is kind of the only company that hasn't cut back capex. Expect them to bring theirs in also when they report.

The stock probably has good support in the upper 30s. Expect somewhat precipitous orders to be met with cries of the bottom. These are tricky stocks in that the core investor plays long ball. It's dangerous to try to game them on a quarter to quarter basis. The current trend is down but this number will be bad enough that investors will start to think about improving rates of deterioration going forward.

Mattson also reports tonight and should have a similarly gloomy outlook.

I feel a little queasy even thinking that but my experience is this is setting up to be the kind of cataclysm news-wise that you get at bottoms.

It's going to be a bad number... and maybe you've got to buy the aftermath. But let's let them blow up first, shall we?

Needless to say, if we see the kind of cutbacks I hope, it's going to embolden buyers of Micron (MU), who have been pecking away at the stock the last few sessions. I think declining capex orders coupled with a rising spot price for DRAM and NAND can continue to move the stock higher.

AAPL -- street is expecting good margins for the quarter on the back of strong Mac sales and increased gross margins on meager iPod sales. Numbers have been creeping higher for the last week or so.

iPods -- 9.5 - 10.5 million. If it's the low end, it will be a negative surprise. Apple bulls think people concerned about iPod #s are silly and missing the larger picture. Hard to see much improvement here near-term.

Macs -- market share gains (IDC showed Mac had picked up a percentage point of share -- thats a big # when you consider Mac originally had 5% and now it's 6% -- a 20% increase) and the too cool for school Macbook Air should total Mac unit sales in the 2.1-2.2 mil range. Anything less would be a disappointment.

iPhones -- kind of the blind spot in the story here near-term. Lots of speculation on when the 3G iPhone will ship. Street may be disappointed if it doesn't ship in June. Expect to see them reiterate their 10 mil unit forecast.

Citi's Rich Gardner was out with a pretty substantial gross margin forecast increase this week, raising his estimate to 36.5%. The street is still under 34%. He also raised his revenue forecast to 7 billion. He says the company will guide revenues, gross margins and profits lower on a sequential basis -- the street is forecasting higher revenues of 7.2 bil for next quarter and this could obviously create some after-market controversy. The bulls will tell you that Apple has become notorious for low-balling the street on guidance.

So here we are, on the other side of the first week deluge of earnings reports. It's helpful for me to talk about what I'm getting from the reports to see if there's anything thematic developing and to make sure the themes I've previously perceived are actually there.

The PC is more recession resistant than people think.

Intel held share, AMD is slipping further away. At Intel, there's not a lot of further slippage since the bar came down.

Broadcom, after a long spell of sub-par performance, has started to show some top line improvement.

Memory prices have picked up of late. Sustainability in DRAM is questionable as these price hikes are driven by how weak business is, not how strong it is. It's a commodity market and it's unlikely will power alone can hold prices up.

The SOX was pricing in far worse results than it's gotten so far.

At 340, many bellwether semis were trading at 10-12* earnings estimates with the justification being the earnings estimates were too high. Estimates have come down but not enough to earn those lower valuations. My experience is that the average semi move is 20%. At 385, we're a little over half-way there. I think they have room to 410 and the index is likely to continue to carry there. The summer is starting to loom. Historically tech sucks in the summer so it better get to 410 quickly.

The semiconductor capital equipment industry is too dependent on memory right now.

That said, capital equipment makers are suffering badly from their dependence on memory. Memory prices have been better since April began but were terrible for the first quarter. Part of the improvement in memory pricing of late is due to capital spending cutbacks by memory manufacturers. This puts the onus squarely on the equipment stocks, which are running far higher than historic dependency on memory for their success. Companies such as Lam Research (LRCX), Varian Semiconductor (VSEA), Mattson Technologies (MTSN) and even mighty Applied Materials (AMAT) have between 50 and 80% of their present business in the memory market. Novellus (NVLS) recently guided to a 25% decline in orders for the coming quarter. Expect to hear that echoed by the industry. Lam Research (LRCX) reports tonight and is likely to reset the order bar severely – it's a short.

The wireless industry is under pressure.

Sub adds have weakened. Subprime problems have caused back-up in the lower end of the US market. Motorola is in shambles. The high end appears to be dominated almost exclusively by Research In Motion (RIMM). Nokia and Ericsson have hit a wall at the high end as Blackberries and iPhones steal all the glory. Texas Instruments took the bar down when they reported but probably not enough. There's still more painful transition going on in this industry that could go on throughout this year.

There's a lot of capital spending in digital TVs as is evidenced by Photon Dynamics (PHTN) order guidance rising so dramatically. Corning is seeing good glass demand. Applied Materials also saw very strong orders in flat panel display equipment. Optronics (AUO) had good numbers. There's certainly a strong build here. This could get derailed by weak consumer spending habits as we move through the year. It's early to call Christmas but there's certainly room for improvement in terms of sell through.

IT spending has not fallen off a cliff… yet.

There's a pause. Companies seem to be saying business will be back later in the year. They're just pushouts and the business will close next quarter. I think this is completely wrong. Those pushouts are rapidly becoming multiple quarter phenomenon. No IT manager wants to be a hero here. Spending is always watched closely when growth is flagging. The financial industry is incredibly important to overall IT spending and its very likely they'll be pulling their horns in all year in anticipation of budget cuts and a lack of ability to get widescale projects approved in an uncertain environment. I find myself becoming increasingly negative on software stocks. I don't write on the sector much but I should start doing that more often.

Number looks fine but I think people were really looking for something explosive here. I'd hate to see what it would look like if they weren't desperately trying to prove that they're worth more than their share price.

I think Microsoft is going to keep make loud, booming noise about how their proposed price is fair and it will probably drown out the squeaky Who-like voice of Yahoo crying out injustice from their tiny, endangered kingdom.

Broadcom came in at the higher end of their guidance with profitability far better than estimates, likely on higher royalty revenues than models carry. I get non-gaap gross margins of 53.9% which is better than consensus of 52.6% but doesn't seem to compensate for the royalties. Expenses look better than expected, though, and non-gaap operating income comes in as much as 50mm better than estimates. Even if I back out the 35mm of royalty income (pure margin) they reported, the operating income is better... and some royalty income had to be expected. They're guiding to growth in all of their business lines due to good customer visibility. Though this stock has had a pretty good move off the bottom, it never belonged at $18 in the first place. I think it still has room to move higher assuming guidance is okay... and it should be.

Stock has some room to $28 just to get to its 200 day moving average. We're probably going to trend to that level.

VMWare beats by 20mm on the top line, guides next Q for 55% growth, which equates to 460mm, slightly below 462mm consensus (will prob be interpreted as conservatism). Rumors had abounded they would miss numbers and the stock is very tight to borrow due to large short interest and small float. Consequently, stock is up ~15% on current quarter numbers better than expected. Balance sheet looks pretty clean -- DSO down slightly sequentially (customers paying them promptly) and deferred revenues up healthily in line with revenue. Unlikely it will come in much as shorts are near-term stuck.

Google can go higher, I guess, but I think the "easy" money has been made. The chart suggested a post-quarter move to $560 and that's what we got. Fast. So much for me buying it on a pullback to $480.

Yahoo reports tonight. It's pretty obvious they're going to try to show the best side they possibly can and pull out all the stops to get Microsoft to pay more. They haven't even reported yet and I already doubt the quality and truthfulness of their results. It's kind of sad.

DRAM makers are trying to push through price increases in the face of their own high inventory levels and a reluctance to continue to sell product below cash cost. 1gb and 2gb were the strongest, moving up 7-10%. It would surprise me somewhat if these prices were to stick as the impetus isn't demand... it's desperation.

Monday, April 21, 2008

Texan reports basically in line for the current Q and guides next Q to a range of 3.2 bil to 3.5 bil with EPS of 42-48 cents. Though I'm directionally correct, I thought they'd be more conservative in light of the wireless inventory correction I see coming for them. Regardless, I think this stock will trade to the mid-20s over the next several weeks.

Texan blamed the economy. I blame an overly optimistic distributor channel and a brewing inventory problem in low end handsets. Tomato, tomahto.

NAND contract prices were negotiated higher for the second half of April by 10-13%. This reflects the recent spot strength, Hynix capacity cutbacks, and a stated goal of raising prices from the major NAND manufacturers.

Texan already lowered guidance at the mid-quarter update for the current quarter. That won't stop them from guiding to below consensus for next quarter. Analog is probably fine. Wireless and DLP are where the problems lie. Wireless is about 35% of business and there's a widespread inventory correction going on. Texas Instruments has only recently become aware of this weakness. As I have said before, Texan has laggy vision with regard to wireless business trends – they sell into a distribution channel which sells into an OEM channel which sells into the wireless carrier channel which sells to an end user. They're very removed from the current state of business as a result. DLP revenues are also subject to a downward revision as they're losing the digital TV battle to LCD and plasma.

Expect to see wireless guidance come down roughly 5-10% relative to consensus and DLP weaker which should bring the overall top line guidance in with a midpoint of $3.3 bil – I'm figuring a range of $3.175 - $3.425 bil for the quarter – the street is at roughly 3.45 bil for next quarter. Gross margins should remain roughly flat at 53.5%. I'm thinking EPS guidance will be about 40-44 cents which is below the consensus of 48 cents.

The unfortunate thing is the street is also cautious and I'm not sure how that will play into the stock reaction. I remain negative but I have no position in Texas Instruments at present. I may be short by the end of the day. We'll see.